Missoula, Mountain Water owner have contentious history

By KEILA SZPALLER of the Missoulian | Posted: Friday, September 23, 2011 5:45 am

Henry "Sam" Wheeler won't sell Park Water Co. to just anyone.

A global investment firm, the Carlyle Group, wants to buy Park Water in California and its Missoula subsidiary, Mountain Water Co. Three other companies have told Wheeler if the deal with Carlyle goes south, they'll make offers.

"They better not hold their breath because if Carlyle doesn't proceed, we wouldn't do anything but continue to run the company," Wheeler said in a recent telephone interview.

That wouldn't be music to Missoula's ears, although Wheeler's stance also won't come as a surprise.

Since 1979 when Montana Power Co. sold its water utility to Park, the city of Missoula has been trying to buy it. Mayors since then have made overtures, but a courtship hasn't blossomed.

"Almost all cities own their own water," said Mike Kadas, Missoula mayor for nearly a decade starting in 1996. "It's kind of an ugly historical twist that Missoula doesn't. It goes back over 40 years, and you know, ever since that, we've been trying to correct it."

Some Missoulians speculate bad blood keeps Wheeler from considering an offer from Missoula, and it's true the city and the water utility have a rocky history. Wheeler, though, said unless a grudge is an investment, he's not holding one.

Even with plans to sell, the man who grew up in the water business holds high standards for Park Water and its Montana subsidiary, Mountain Water. In the pending sale, Wheeler said the family will retain a limited interest in Park stock.

The company president said he's keeping Park Water intact to preserve its financial strength and borrowing power. Regulators expect utilities to seek capital for improvements, yet the global money market is shaky.

"I think it's going to be a lot easier with Carlyle's financial strength working with our people than it will be to go out in a very tough money market," Wheeler said. "I mean, you've seen your newspaper headlines talk about it all the time. It's one crisis after another. We want stability."


It isn't clear why Missoula didn't buy the utility from Montana Power back in 1979. City Attorney Jim Nugent, who worked for city government at the time, said the power company contacted Mayor Bill Cregg about a purchase.

"Before he and the (city) council could consider it, Montana Power announced they had sold it to Sam Wheeler," Nugent said. "I know the city officials were pretty concerned and upset because they didn't feel they had a fair opportunity."

Wheeler tells a different version of the story. He and Jack Burke, then vice chairman of Montana Power Co., happened to meet during a rate case, and they talked about a transaction.

"Montana Power wanted to make sure that the city of Missoula didn't want to buy it at that time. So Jack Burke went to them. It wasn't quietly. He took pains to do it," Wheeler said.

He said the city didn't have either the money, time or know-how to pull off the purchase: "It's easy to go back and say, ‘Gee, they didn't have a chance.' They're big boys, and if they want to buy it, they need to know how they're going to pay for it."

Missoula turned down the opportunity, Wheeler said, and a Mountain Water official said it did so after "some deliberation."

"They said no, so we went ahead and bought it," Wheeler said. "We didn't want to buy it if there was going to be a squabble on our hands at the get-go. We didn't want to buy trouble."


Trouble came anyway.

Park Water bought the Missoula utility for some $8 million, and every mayor since at least explored buying it. The deals have been thwarted by everything from raw sewage to the Montana Supreme Court.

Mayor John Toole tried to force a takeover, a move that created animosity between the city of Missoula and Park Water.

In 1984, the city filed a request for condemnation in court, said Arvid Hiller, Mountain Water vice president and general manager. As part of their argument, he said city officials proposed "dramatic cuts in the salaries of all the employees."

Missoula failed to communicate with Mountain Water staff, though, and Hiller was among the employees who successfully argued the city wasn't taking into consideration impacts on the lives of employees.

The Montana Supreme Court eventually agreed and cited the city's harsh approach as one piece of evidence, Hiller said: "The callous treatment of the employees by the city of Missoula in itself was (one) reason to find (it was) not in the public's interest for the city to own the water system."

Only four Mountain Water employees who went through that fight are still with Mountain Water, Hiller said. The others have retired, but for a time, the battle tainted the company's working relationship with the city.

"There were a lot of hard feelings generated from this attempt at a hostile takeover," Hiller said.

The high court also ruled that since the city had created the court battle, the city had to pay Mountain Water's legal fees, some "hundreds of thousands of dollars," Hiller said.

The case was resolved in the company's favor in 1989, and Hiller said Wheeler was adamant he would never sell his company to the city of Missoula because of the way it tried to wrest Mountain Water from him.


But a strong relationship with the city is crucial to Mountain Water operations. In 1990, Wheeler traveled to Missoula to talk with Hiller about his promotion to general manager.

"This was his mandate to me: ‘I want you to rebuild the working relationship with the city of Missoula,' " Hiller said.

Wheeler said the directive was both decent and wise: "We have to work side by side with them underground and above ground. If we can't cooperate with them, there's going to be all kinds of mistakes and screw-ups, and they can be extremely costly and dangerous. We just can't stand on ceremony and say we hate the other guy. Because we don't. It's practical is all it is."

As Hiller worked to mend old wounds, Missoula mayors continued their quest to secure water for their community. Nugent believes the late Mayor Robert Lovegrove traveled to California in the late 1980s to talk directly with Park owners about a sale.

On the heels of the Montana Supreme Court rulings against the city, Mayor Dan Kemmis pursued a right of first refusal instead of more fighting in court, a right finally secured by Kadas.

Hiller, though, said the pledge was symbolic. A letter was carefully worded to promise the opportunity, but only on the condition Park sold Mountain Water separately.

And Wheeler never planned to pursue that scenario.

Instead, Hiller said, Park Water wanted to "bury the hatchet" and establish goodwill. He continues to tell Mountain Water's nearly 50 employees to remain positive in dealings with the city of Missoula and not let any friction in the proposed sale sour them on the job. The work is too important.

"We have 370 miles of water main and facilities throughout this whole city of Missoula in the same places the city has streets and sidewalks," Hiller said. "We need to work together in a fashion that makes it efficient and cost-effective for the taxpayers and the water customers."


Now, Mayor John Engen also wants to buy Mountain Water, and he's floated $50 million as a fair price. In testimony to the Montana Public Service Commission, Engen said he plans to request commissioners place conditions on the proposed sale of Park and Mountain Water to the Carlyle Group.

"Because all evidence suggests that there is no chance of municipal ownership under Park's watch and because there is a chance at municipal ownership under Carlyle's watch, the city supports the transaction," Engen said in testimony.

He also pointed out that Park Water sold the Superior water company to the city of Superior, so there is precedent for a municipal sale. According to Missoula's analysis, the city could pay for the system and incremental upgrades with current rates since overhead costs - such as money sent to California - would decrease.

Kemmis, who still believes the Montana Supreme Court wrongly interpreted the law in the condemnation case, has suggested Engen give an eminent domain acquisition - with a twist from condemnation to protection - another try as a last resort. The Montana Constitution clearly protects the right to a healthy environment, and he said "water is so clearly a key element of a healthful environment."

"The court that decided the case back in the '80s was a very different court and took a very different view of some of these issues than the current court has done," Kemmis said.

Hiller and Wheeler disagree and believe the court again would determine city ownership isn't in the public interest when it comes to both water quality and rates. For one thing, Wheeler said the company wouldn't pay taxes anymore, so someone would have to make up shortages to the city, the state and other jurisdictions.

Such a case isn't before the court, but last year, Mountain Water sued the Public Service Commission to prevent having to reveal salaries of its top managers. The case is pending.

Wheeler, meanwhile, intends to keep his company intact even as he passes on most of its stock. He views his employees as family and said he already has turned down offers from companies he suspects would cut his work force.

"They're a team. We've built them up for years, and frankly, we think they're the best. We don't want to disrupt any of that," Wheeler said.

Wheeler also said inflation has made replacing infrastructure costly, yet doing so is necessary. A company must be large enough to have its own "skin in the game" and also attract outside money because interest can be deducted and lowers the cost of doing business.

"Missoula waterworks by itself could probably borrow money, but it would be very adverse terms. Maybe they wouldn't lend to you at all in this kind of market," Wheeler said. "Park Water was started in 1937. It's got a history and a credit rating. That's the practical difference. You've got to keep it as a package."

Reporter Keila Szpaller can be reached at 523-5262, keila.szpaller@missoulian.com or on MissoulaRedTape.com.